"When I read the remarks by (Deputy Governor of the Bank of Israel) Prof. Nadine Baudot-Trajtenberg yesterday, I had an odd feeling. The prices in the mortgages market rose as a result of the central bank's instructions, so if someone at the Bank of Israel is wondering why prices in the mortgages market rose, it raises the question of whether the right hand knows what the left is doing," a senior banking source said today in response to remarks by Baudot-Trajtenberg on the subject of the rise in the interest for mortgages over the past year.
Speaking about the increase in mortgage costs yesterday at a conference of the Aaron Institute for Economic Policy in the Interdisciplinary Center Herzliya, Baudot-Trajtenberg said, "Perhaps because it reflects a higher risk premium or because we know that the large banks have reached the mortgage limit that they want to loan and so there is less competition for mortgages." She added that the competition in the mortgages market was intense, but the wider spreads could indicate a slackening of competition, saying, "It could be that spreads have become wider because of the risk, and it could be because the competitive situation in the market has weakened over the past year."
The banks were surprised by Baudot-Trajtenberg's comments, since the main reason for higher mortgages prices is the instructions published by the Bank of Israel itself in recent years aimed at cooling off the red hot real estate market.
The Bank of Israel today clarified that Baudot-Trajtenberg had not meant that competition had lessened, but that the banking system had realized the risk incurred in housing credit, and as a result had diverted some of the banks' resources to other areas.
After a long period of strong performances in the housing market, the Bank of Israel Banking Supervision Department published a series of instructions to the banks on mortgages in recent years. One of the measures taken by the central bank was increasing the proportion of risk assets in mortgages from 35% to 60% on the average (depending on the volume of financing in the deal). This meant that the banks had to set aside more capital for a mortgage, which increased their costs. In addition, in cases of purchasing groups and loans of over NIS 5 million, the proportion of risk assets rose to 100%, forcing the bank to make a group provision amounting to 0.35% for each new mortgage.
Furthermore, the Bank of Israel has increased the overall capital adequacy requirements for the banks (the ratio of equity to risk assets, most of which are in the mortgage portfolio). The interest rates have indeed risen: while the average fixed interest rate for index-linked mortgages in June 2015 was 2.05%, this had risen to 3.15% as of the end of April 2016. The variable interest rate on index-linked mortgages also rose from 1.84% in June 2015 to 2.46% at the end of 2015 and 2.6% at the end of April 2016.
"Had we fully priced the changes imposed on us, the spread would have doubled itself, compared with the past. Instead, we saw a rise of 15-20% in spreads. The reason is the intense competition in mortgages, in contrast with Baudot-Trajtenberg statement about weaker competition," a senior figure at one bank said.
The banks noted that the Bank of Israel's instructions had originally been designed to increase prices in the market, in the expectation that this would cool off the mortgages and real estate market. In practice, however, it appears that demand for housing is inelastic, and despite more expensive mortgages, the banks are still posting strong performances of NIS 5 billion in new mortgages a month.
"When the instructions were imposed, we told the Bank of Israel that they would make capital significantly more expensive, and they themselves told us to price that. Now comes somebody from the Bank of Israel and asks why the price went up," the source said.
"Globes": Nevertheless, we have seen that Bank Leumi (TASE: LUMI)" and Bank Hapoalim (TASE: POLI) have reduced their market share in recent months, so competition eased, and it was easier to raise prices, wasn't it?
"The two dominant banks have higher capital requirements than the other banks. In order to meet the targets, they had to reconsider the distribution of credit between the sectors. On the other hand, the smaller banks are taking advantage of the situation, and have become more aggressive, especially in high-risk mortgages. In the bottom line, competition hasn't lessened."
Most of the restrictions imposed by the central bank were in 2012-2014, while the increase in prices took place mainly over the past year. The banks explain this by the impending deadline for meeting the capital adequacy targets (the end of 2016), with quarterly steps being set on the way to the target.
"In recent months, the question of capital has become critical, and the banks are setting priorities for where to put their capital - in mortgages or other business, such as retail, which is considered more worthwhile," a bank source explains. He predicts that the upward trend in mortgage price will continue into the coming months.
Published by Globes [online], Israel business news - www.globes-online.com - on June 21, 2016
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